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Board of Trustee Meeting Minutes - March 10, 2011

Members Present:  John Hammond, Howard Brown, Dennis Callahan, Jay Cuccia, Richard K. Drain, Jonathan Hodgson, Jay Middleton, M. Kathleen Sulick, LeRoy Wilkison            

Members Excused: Janelle Davis, Andrea Fulton, Jennifer Gilbert-Duran

Staff Present:  Janet Morgan, John Peterson

Guests:  Chris Ade, Cynthia Duda, Patrick Cunningham, Jim Gereghty, Steve Hansen, Rhett Humphreys, Cliff Yonce  

Recorder:  Laura C. Jackson, Audio Associates

The meeting of the Board of Trustees of the Anne Arundel County Retirement and Pension System (Board) was called to order at 12:15 p.m. by John Hammond.


Mr. Wilkison made a motion to approve the minutes of the February 10, 2011, board meeting. Mr. Callahan seconded the motion, and the motion passed unanimously.

Investment Committee

Siguler Guff

Siguler Guff’s Distressed Opportunities Fund III has a value of $2.4 billion. The fund, which closed in March 2009, is about 74 percent invested and essentially fully committed, said      Mr. Yonce. This diversified portfolio invests in a broad spectrum of distressed securities, strategies, industries and geographies.

The current distressed cycle has been much larger, broader and deeper than anyone expected, and many more opportunities remain, said Mr. Yonce. Siguler Guff is back in the market raising capital for its fourth distressed fund, he said. The county pension system committed    $5 million to Fund III.

Mr. Gereghty joined the team following the departure of a former team member. Reviewing the fund’s portfolio distribution, Mr. Gereghty said the fund invests primarily in secured and senior debt. The fund began deploying capital aggressively during the fourth quarter of 2008 and in 2009, taking advantage of rallies in the marketplace. Markets continued to tighten throughout 2010, he said, and liquidations have led to distributions in 2011. The estimated net performance to investors is about 17 percent since the first quarter of 2008, he said.

In response to a question from Mr. Hodgson, Mr. Gereghty said distressed debt is a type of sell decision based on political, contractual or social reasons. The firm looks across all asset classes to find distress and invest money. Global opportunities include corporate leveraged loans, consumer debt and commercial real estate.

Mr. Wilkison asked about Siguler Guff’s views on commercial real estate. Mr. Gereghty said the firm invests in this sector on the basis of regional markets as each area is unique. Siguler Guff uses a similar approach to work with community/regional banks.

The portfolio fund within Fund III has had returns of 21 percent, whereas direct investments showed a performance of 27 percent. The firm expects direct investments to outperform because managers cherry pick the best, said Mr. Yonce. Companies within the direct investment portfolio include Kloeckner, a chemical company in Europe, and IntelSat, a special situation involving a bank forced to sell a loan.

Although many problems remain within the ailing economy, Mr. Yonce said corporate debt is coming back on the horizon quickly, so board members should continue to include distressed debt in their fiduciary planning.     


ING Clarion Partners is the U.S. arm of ING Real Estate Investment Management. The firm has managed investments for the county pension system since 2005.

Mr. Hansen reported that ING Clarion Partners is being sold by ING Group to its management team. Its new financial partner is the New York-based Lightyear Capital, LLC, which specializes in the financial services industry. Senior management will contribute $20 million to the new ownership and will have substantial economic sharing in the firm. He anticipates no changes to the Lion Properties Fund or its management team.

The Lion Fund invests in retail, office and hotel space in such top markets as Washington, DC, New York, Los Angeles, San Francisco and Houston. The fund has a real estate value of about $5 billion. Given trends in the marketplace, ING plans to place greater emphasis on properties related to health care or sustainable/renewable energy. 2010 was a rebound year for the fund, which saw a return of 19.16 percent, he said.

The portfolio is young in age and leased at a high level, said Mr. Hansen. Washington, DC, the fund’s top market, is home to the portfolio’s largest property, the One Metro Center office space. All assets are fully insured, he added.

ING began reducing its suburban office holdings in 2005 because office space is cyclical. In another defensive posture, the fund’s percentage of retail holdings is also lower than its benchmark. Mr. Callahan asked if the fund has lost some major big-box retailers to bankruptcy. Mr. Hansen said most of its retail space is made up of neighborhood,               grocery-anchored shopping centers that draw daily or weekly shopping. ING tends to hold its office leases for 10 years and retail leases for 10 to 15 years, said Mr. Hansen.

Although 2008 and 2009 were period of unprecedented correction, the firm never curtailed its distributions, summed up Mr. Hansen. In the aftermath of the financial crisis, the fund has room to rebound and see positive returns.

Capital Dynamics

Capital Dynamics took over the HRJ portfolio in June 2009. Currently operating in a growth mode, the firm has 10 offices worldwide and more than 180 professionals. 

The HRJ Special Opportunities I fund focuses on equities and distressed debt, said Ms. Duda. The strategy includes turnaround, loan-to-own, and asset selection/opportunistic investments in the United States, Europe and Asia. Nearly 50 percent of the fund’s investments are in asset selection/opportunistic strategies. The fund’s five largest distributions are in distressed debt.

Although the fund invested a little early, just prior to the market downturn in 2008, managers have enjoyed the recovery during the past year, said Ms. Duda. She noted that the distressed debt managers invested quickly and have begun to return capital, whereas equity managers are investing more slowly. Reviewing the underlying managers, Ms. Duda said three in particular have held back: Orlando Italy, Orlando SSRP (a German real estate investor) and Patron Capital III. Given the troubled economy in Europe, the fund has benefited from these managers’ hesitation. On the other hand, J.C. Flowers got the timing wrong and took a major hit during the downturn, she said. This is the only underlying fund that will not return expected capital.

Ms. Duda wrapped up the discussion with a look at recent investments. Reviewing the fund’s top 10 holdings by value, Ms. Duda said RailAmerica benefited from the recent increase in oil prices. Other strong performers include Holiday Retirement Corp., Nationstar Mortgage and Pride International. Although the fund invested about a year too early, it should see positive returns, she said.

New England Pension Consultants

The “flash” report for the period ending February 28 showed financial composite returns of 2.3 percent and year-to-date performance of 3.2 percent, said Mr. Humphreys. Domestic equity was the largest driver of performance, with year-to-date returns of 6.9 percent against a benchmark of 5.7 percent, he said.

Mr. Humphreys noted two big negatives: emerging market equities and emerging market debt. Until just recently, these two areas had played a major role in the pension system’s rebalancing strategy, he said. Funds under Global Asset Allocation and Total Absolute Return performed as he expected. 

Reviewing changes to ING Clarion Partners, Mr. Humphreys spoke positively about the partnership with Lightyear Capital. And after a period of careful review, NEPC has given the go-ahead to clients considering Siguler Guff’s Fund IV.

Administrative Report

The pension system has begun its annual disability earnings verification, said Mr. Peterson. He also reported that Clifton Gunderson is wrapping up the audit. The board will review the pension budget April 7. He noted 8 retirements so far in March, which is about average.  

The meeting ended at 2:10 p.m. The next meeting will take place on April 7.                   


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